Localisation and delocalization of firms localisation of firms

Business studies study module

Localisation of firms means the concentration of similar firms in one particular area/region.

Subsidiary industries usually develop around the main industries, either to use the by-products of the main industries or to supply them with component parts.

The factors which encourage localization of firms include:

  • A well developed infrastructure in an area which attracts firms into that area
  • Availability of large population which may provide both labour and market
  • Interdependence among various firms in areas such as training of personnel
  • Government policy requiring firms to be located in a certain area
  • Availability of raw materials in a certain area
  • Availability of ancillary services such as banking, insurance and warehousing

Advantages of localization

Service industries/Ancillary services: It encourages the establishment of support business enterprises e.g. if many firms are located in one region, institutions such as banks, insurance companies and distributors are likely to set up businesses in the area to offer services required

Creation of pool of labour:When industries are concentrated in one area, people tend to migrate to that region in search of employment thus encouraging creation of a pool of labour force. This enables firms to meet their labour force requirements.

Creation of subsidiary industries:Localised firms are likely to attract others which use the finished products of the established firms as raw materials or selling raw materials to the existing firms.

Disposal of waste: Localised firms are able to easily dispose off their waste either selling them to other firms for recycling or jointly undertaking waste disposal projects.

Creation of employment: It encourages creation of employment opportunities in the region (it creates interests in the type of labour required thereleading to creation of employment opportunities.

Development of infrastructure: Concentration of firms in one area encourages development of the necessary infrastructure such as water systems, roads, communication network, health and education facilities in the region

Economies of scale: Firms can combine to employ benefits of large-scale production for the benefits of consumers.

Reduction in costs: Firms that depend on each other for inputs or disposal of outputs are able to save on transport costs when they are located near each other.

Disadvantages of localization

Adverse environmental problems: Concentration of firms in one region may have a negative impact on environment in that region e.g. emissions from factories may cause both air and water pollution; there may also be noise pollution and poor disposal of refuse.

Unbalanced regional development: Localisation of firms may lead to regional imbalance in development. For instance, areas of industrial concentration tend to enjoy provision of social amenities in terms of roads, schools, hospitals and other facilities while other regions suffer. This may cause dissatisfaction among the citizens and disturb national cohesion and unity.

Rural-urban migration:Localisation of industries contributes to rural-urban migration. People migrate from rural to urban regions in search of employment and better living conditions. Such movements may cause;

  1. Open unemployment in towns while in rural areas they may cause labour deficiency
  2. Increased population in the areas of industrial concentration sparking a series of problems such as congestion, increased rate of crime, poor living conditions, spread of diseases e.g. HIV and housing problems.

Possible massive unemployment: A fall in demand of products produced localized firms would result into a widespread unemployment in the affected area.

Strategic reasons: The concentration of firms in one area is risky for a country especially in times of war or terrorism activities as such are easy targets for attack. This may destroy the country’s industrial base/capability which may take many years to rebuild.

Dependence: Localisation of firms in one area creates an over-dependence on the products of a single industry. In case of a calamity, the supply of the product from the firms may be disrupted, resulting in serious shortages.

Delocalization of firms

Delocalization refers to establishment of firms in different parts of the country as opposed to localization where firms are concentrated in one area.

Delocalization is usually a deliberate government policy of encouraging establishment of firms in various parts of the country, and is applicable under the following circumstances:

-where there is need to curb migration to certain towns

-Due to need to reduce the rate of urban unemployment

-In order to achieve balanced economic development

-As a measure of reducing pollution and social evils in certain urban areas

Advantages of delocalization

Employment creation in many parts of the country: it provides employment opportunities to people living in rural areas thereimproving the peoples living standards and reducing rural-urban migration.

Balanced economic development/balanced regional development: economic development is initiated for many, if not all parts of the country. This promotes national cohesion and unity; and also reduces rural-urban migration.

Market for raw materials: delocalisation creates market for locally produced raw materials therecreating employment and earning producers income.

Urbanization: This accelerates the rate of urbanizing in many parts of the country, especially to the rural areas.

Service delivery to rural areas/Development of social amenities: It encourages the growth of both social amenities such as hospitals, schools and security firms and infrastructure.

Reduces the effects caused occurrence of war, terrorism attacks or earthquakes.


  1. Difficulty of attracting requisite personnel; This is mainly in the remote or rural areas where the delocalisation may be done. These areas do not usually have the comfort of social amenities of the urban areas, hence are less appealing to highly qualified personnel.
  2. Difficulty of accessing certain assential services; These are services that may not be in the rural areas where delocalisation is done e.g. banks, insurance co’s e.t.c
  3. Spread of pollution, congestion and social evils; These vices spread to various parts of the country.
  4. Tax burden; The incentives which are provided the government to promote smooth relocation are expensive and are an extra burden to the tax payer.
  5. Security; This maybe a problem in some areas.
  6. Substandard goods; Continued protection from foreign competition the government may make the firm to continue producing substandard products.

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